UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 333-24739
STONEVILLE INSURANCE COMPANY
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(exact name of Registrant as specified in its charter)
MISSISSIPPI 72-1341156
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(State or other jurisdiction of (I.R.S. Identification Number)
incorporation of organization)
633 North State Street, Suite 200, Jackson, Mississippi 39202-7817
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(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (601-352-7817)
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Securities registered pursuant to section 12(g) of the Act: None
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes ( X ) No ( )
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act if
1934 during the preceding 12 months (or for such shorted period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES ( X ) NO ()
Issuer's revenues for the most recent fiscal year: $401,873
Aggregate market value of equity held by non-affiliates: To the
issuer's knowledge there has never been a sale of its common stock or any bid or
asked prices of such stock.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 27, 1998
Common stock, $1.00 par value 503,384 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
<PAGE>
STONEVILLE INSURANCE COMPANY
FORM 10-KSB
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Organization and Purpose
Stoneville Insurance Company (the "Company") was formed to become the
successor of Delta Agricultural and Industrial Trust, a Mississippi workers'
compensation self insurance trust (the "Trust") pursuant to a Plan and Agreement
of Reorganization and Conversion of the Trust (the "Plan"), which was effective
at the close on business on December 31, 1997. Pursuant to the Plan: (i) the
Trust transferred substantially all its assets and liabilities (other than
insurance liabilities) to the Company; (ii) in exchange for the contribution of
the such assets and liabilities by the Trust to the Company, the Company issued
shares of common stock of the Company ( "Stock") to the Trust; and (iii) the
Trust liquidated and distributed to former members of the Trust ("Former
Members") one (1) share of Company Stock for each Trust Unit ($4.00 of value of
Trust equity) allocable to such Former Member (collectively, the "Liquidating
Distribution").
On January 1, 1998, the Company was licensed by the Mississippi
Department of Insurance to write workers' compensation insurance in the State of
Mississippi.
Background
The Trust was formed under a Trust Agreement dated August 1, 1991, by
members of the Delta Council of Stoneville, Mississippi, as a response to the
unavailability of workers' compensation insurance at reasonable prices. The
Trust was originally organized to provide workers' compensation insurance to
cotton gin owners, but subsequently expanded its workers' compensation insurance
activities. From the beginning of the Trust through June 30, 1996, the Trust
sold its workers' compensation insurance through a nonexclusive network of
agents. With the inception of the Commercial Program (described below), the
Trust ceased providing direct insurance coverage and arranged for the Trust's
agent network to place its insureds with a commercial insurer in accordance with
a program jointly designed by the Trust and the commercial insurer.
Effective July 1, 1996, pursuant to an Insurance Placement Agreement by
and between the Trust, TIG and TIG Reinsurance Company (the "Insurance Placement
Agreement") the Trust ceased writing workers' compensation insurance directly
and moved the persons who wished to maintain their affiliation with the Trust to
the Trust's Commercial Program. Under the Commercial Program, TIG (an "A"
(Excellent) rated commercial insurance company according to the A.M. Best
Company), provided workers' compensation insurance primarily to former members
of the Trust
<PAGE>
and other persons through the Trust's network of agents.
The Trust created the Commercial Program in order to allow its insureds
to take advantage of the lower rates being offered by commercial insurers while
preparing the Trust for conversion to a Mississippi domestic stock insurance
company, which the Board of Trustees believes will best assure long term
availability of reasonably priced workers' compensation insurance. The Insurance
Placement Agreement provided that the Trust (or the Company as the Trust's
successor) may provide reinsurance with respect to policies issued by TIG under
the Commercial Program. The Company has not yet exercised this right, but may do
so in the future.
As part of the creation of the Commercial Program, the Trust also
entered into a Representative Agreement (the "Representative Agreement") with
MRM Underwriters, Inc. ("MRM") by which MRM acts as the Trust's representative
for marketing the Commercial Program and allocates to the Company, Inc. certain
amounts for oversight and administration of the Commercial Program and the
Trust's operations. MRM is responsible for marketing the program as a general
agent of TIG and for overall administration of the program. The Company is
responsible for sending bills, collections, liaison, program oversight, and
obtaining association endorsements. Pursuant to the Representative Agreement,
MRM receives 3.9% of the collected premiums generated by the Commercial Program.
The Representative Agreement was entered into on July 1, 1996 and will continue
until terminated. The Representative Agreement shall automatically terminate
with no notice required upon (i) the bankruptcy, receivership, assignment for
the benefit of creditors or similar action of MRM or the commencement of any
such proceedings by or against MRM; (ii) the termination of the general agency
relationship between TIG and MRM; or (iii) the termination of the Placement
Agreement between TIG and the Trust for any reason. The obligations of the Trust
under the Representative Agreement were assumed by the Company subsequent to the
Conversion for the duration of the Commercial Program. MRM is controlled by
David R. White, who is an officer and director of the Company.
Company Management's Plan of Operation
The Company intends to concentrate its business activities on providing
workers' compensation for businesses in the agricultural and industrial sectors
in Mississippi and, in the future if desirable opportunities arise, in nearby
states. Company management believes that it has a base of experience in
agricultural workers' compensation risk (such as cotton gins) which is
transferable to other states. In addition, so long as the Company is licensed as
a workers' compensation insurer in Mississippi, it may participate under certain
circumstances in workers' compensation programs similar to the those in
Mississippi without licensure by such other states.
The Company is a party to an Assumption Reinsurance Agreement dated as
of March 20, 1997, with Continental Casualty Company ("Continental"), a member
of the CNA Insurance Group. The Assumption Reinsurance Agreement was
subsequently amended effective September 5, 1997. The CNA Insurance Group has a
rating by the A. M. Best Company of "A" (Excellent). This rating applies to the
group's nine-member intercompany pool which includes Continental. Under the
Assumption Reinsurance Agreement, Continental assumed the Trust's insurance
liabilities for the
<PAGE>
period through July 1, 1996, when the Trust ceased writing workers compensation
insurance. Under the terms of the Assumption Reinsurance Agreement, the Company
had the option to reinsure Continental with respect to the insurance which
Continental directly assumed. The Company has exercised this option by providing
written notice to Continental prior to the exercise date.
The Company has also entered into a quota share reinsuirance agreement
with Continental with respect to business written by Continental or affiliated
companies under the program for the period from July 1, 1997 through September
1, 1998. The Company will reinsure a 25% share of this business. The Company
will be required to collaterlize the agreement with a letter of credit totaling
$100,000 per $1,000,000 of gross premium written under the program.
In addition to the programs, the Company may develop workers'
compensation insurance programs with other large carriers. It is anticipated
that these programs will be structured in a manner similar to the programs
described above, and the Company would participate as a reinsurer of the
business written by the commercial carriers.
Investments
Management of the Company's portfolio of investments is a significant
part of the Company's business. The Company's investments are limited by
statutes and other regulations which restrict a large portion of such
investments to specific categories. The Company is expected to invest in
securities and other investments authorized by applicable state laws and
regulations and receive income from such investments in the form of interest,
dividends and capital gains. The Company expects to follow an investment policy
designed to maximize yield to the extent consistent with liquidity requirements
and preservation of assets. The Company has retained Investek Capital
Management, Inc. as its investment advisor. Investek currently manages over $1
billion and has substantial experience in investing funds of insurance
companies.
Competition
The insurance industry is characterized by competition primarily on the
basis of price. However, availability and quality of products, quality and speed
of service (including claims service), financial strength, distribution systems
and technical expertise are also important elements of competition. Many of the
Company's competitors are larger and have greater resources than the Company.
Employees
The Company currently has 2 full-time employees.
Supervision and Regulation
The Company is subject to regulation by the Department of Insurance
although control over the delivery of benefits is generally under the purview of
the Workers' Compensation Commission.
<PAGE>
The primary purpose of regulation by the Department of Insurance is to provide
safeguards for policyholders rather than to protect the interests of
shareholders. The Department of Insurance has broad administrative powers
relating to the licensing of insurers and their agents, the regulation of trade
practices, transactions with affiliates, investments, deposits of securities,
the form and content of financial statements, accounting practices, reporting
requirements, sales literature, insurance policy forms and the maintenance of
specified reserves and capital and surplus.
Workers' compensation insurers such as the Company must maintain
reasonable ratios between net written premiums and statutory surplus in order to
be consistent with sound underwriting practices and requirements of insurance
regulators and rating agencies. Accordingly, an insurance company's volume of
net written premiums is limited by the amount of its statutory surplus. As the
premium volume of the Company grows, its statutory surplus must also increase so
that the ratio of net written premiums to statutory surplus does not become too
high. The Company's objective is to maintain the ratio of net written premiums
to statutory surplus within the maximum guidelines of the NAIC.
Insurance companies are required by law to maintain reserves for
claims. These reserves are intended to cover the probable ultimate cost of
settling all claims incurred and unpaid, including those not yet reported.
Reserves are determined by the Company in accordance with applicable law.
Reserves are monitored by the Company using a variety of techniques for
analyzing claim cost and frequency data and other economic factors. Among other
techniques, the Company periodically compares estimated and actual expenses for
settled claims and adjust its reserve estimates, if necessary, on the basis of
such comparisons. Claim reserves are estimates only, and it is possible that
ultimate liability may exceed or be less than such estimates.
Under Mississippi law, workers' compensation insurers must maintain a
reserve for losses as well as a reserve for unearned premiums. The assets
constituting the unearned premium reserve must be withdrawn from use by the
Company for its general purposes and are gradually released over the life of the
policy.
Upon being licensed by the Department of Insurance, the Company
automatically became a member of the Mississippi Insurance Guaranty Association
(the "Guaranty Association"). The purpose of the Guaranty Association is to
provide a mechanism for the payment of claims made by insureds against an
insolvent insurer. The Association may assess insurers to pay the obligations of
the Association in accordance with a statutory formula based on net direct
premiums written.
Upon being authorized by the Department of Insurance to write workers'
compensation insurance in Mississippi, the Company was required to be a member
of the Mississippi Workers' Compensation Assigned Risk Pool ("the "Pool") and to
participate in the Mississippi Workers' Compensation Assigned Risk Plan (the
"Plan"). The purpose of the Pool is to be a reinsurance mechanism for the Plan.
The Pool may assess insurers to pay the obligations of the Pool in proportion to
the insurers' direct net workers' compensation premium writings in Mississippi.
So long as the Company does not directly write workers' compensation insurance,
it will not be subject to assessment by the Pool.
<PAGE>
In a stock insurance company structure such as the Company's, there is
no personal liability of the shareholders in the event the insurer becomes
insolvent and is not able to pay claims. The claims are assumed by the Guaranty
Association. This is in contrast to the joint and several liability of members
of group self insurers such as the Trust.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
Stoneville Insurance Company leases it principal executive offices
located at 633 North State Street, Suite 200, Jackson, Mississippi. Management
believes the offices are in good condition and adequate for the Company's
foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
On April 21, 1997, the Trust initiated an arbitration proceeding with
the National Association of Securities Dealers, Inc. ("NASD") Office of Dispute
Resolution against Bear Stearns Securities Corp., Bear Stearns & Co; Axiom
Capital Management, Inc.; Kevin Connors; and Mitchel Guttenberg (the "Securities
Arbitration"). In the Securities Arbitration Statement of Claim, the Trust asks
for $2,062,185 in actual and punitive damages as a result of improper trading on
its account by the persons listed above. After initial discovery, Mitchel
Guttenberg was voluntarily dismissed by the Trust. Discovery is continuing and
the matter should be resolved by a three- person arbitration panel in June 1998.
Following the Conversion, the Company succeeded to the Trust's claim in
the Securities Arbitration. Other than the pending involvement of the Company in
the Securities Arbitration as successor to the Trust, the Company is not
involved in any pending legal proceeding nor are any material legal proceedings
known by the Company to be contemplated by governmental authorities other
parties, to which the Company is or might become a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for the Company's shares.
Management of the Company is not aware of any trades of Company stock.
Holders
As of March 27, 1998, there were 402 holders of record of Common Stock
of the Company.
Dividends
The Company has paid no dividends since its inception and there are no
present plans to pay dividends. Under Mississippi law, the Company may pay cash
dividends only from actual
<PAGE>
net surplus determined on a statutory basis. In addition, "extraordinary
dividends" or "extraordinary distributions" may not be paid until thirty (30)
days after the Commissioner of Insurance has received notice of the declaration
thereof and has not within such period disapproved such payment, or the
Commissioner has approved such payment within such thirty (30) day period.
Extraordinary dividends or distributions are defined as any dividend or
distribution of cash or other property whose fair market value together with
that of other dividends or distributions made within the preceding twelve months
exceeds the lesser of (i) ten percent (10%) of the Company's surplus as regards
policyholders as of the December 31 next preceding, or (ii) the net income of
such insurer, not including realized capital gains, for the twelve month period
ending the December 31 next preceding, but shall not include pro-rata
distributions of any class of the insurer's own securities. In determining
whether a dividend or distribution is extraordinary, an insurer may carry
forward net income from the previous two (2) calendar years that has not already
been paid out as dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
The following selected financial data reflect operations of the Company since
January 1, 1996 and have been derived from the financial statements examined by
Richard L. Eaton, independent certified public accountant whose report with
respect thereto appears elsewhere in this report.
<TABLE>
<CAPTION>
Selected Financial Data
For the Years Ended December 31, 1997 and 1996
1997 1996
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<S> <C> <C>
Earned Premium $ 0 $ 2,077,351
Premium Ceded 0 (89,860)
Net Investment Income 193,465 296,669
Realized Gains and (Losses) available-for-sale
securities 0 (37,286)
Gain or (loss) on Disposition of Equipment (1,406) 0
Other 209,814 (422,850)
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Total Revenue $ 401,873 $ 1,824,024
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Net Income (Loss) Before Tax Provision $ (759,459) $ 128,573
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Net Income (Loss) $ (474,439) $ 29,805
================ ==============
Total Assets $ 2,132,019 $ 5,732,868
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Total Liabilities $ 118,482 $ 3,279,411
================ =============
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Stoneville Insurance Company (the "Company") is the successor to the
Delta Agricultural and Industrial Trust, (the "Trust"), a Mississippi non-profit
corporation which was liquidated and dissolved pursuant to the Plan of
Reorganization and Conversion of the Trust (the "Plan) which became effective at
the close of business on December 31, 1997. Under the Plan, the Trust
transferred all of its existing assets and liabilities (other than insurance
liabilities) to the Company in exchange for all of the stock of the Company. The
stock was then distributed to former members of the Trust based on each former
member's proportionate share of the equity of the Trust. Each former member
received one share of stock for each Trust unit ($4.00 of value of trust equity)
allocable to such former member.
The insurance liabilities of the Trust were assumed by Continental
Insurance Company ("Continental") as part of an Assumption Reinsurance Agreement
(the "Agreement") entered into by the Trust and Continental. The Agreement
provided that Continental would assume all of the existing insurance liabilities
of the Trust and gave the Trust or its successors the right to provide
reinsurance to Continental.
The Trust was formed in 1991 to provide workers compensation insurance
to its members at a time when many of such members were having difficulty
finding workers compensation insurance within the commercial market. The Trust
was established to insure that its members would have consistent coverage at
reasonable rates regardless of the cyclical swings in the commercial market.
In early, 1996, Mississippi Department of Insurance made changes to the
method of establishing the rates commercial insurance carriers could charge for
workers compensation coverage. As a result of this, rates among commercial
carriers dropped significantly. The Trustees of the Trust believed that the
interests of its members would best be served by forming a relationship with a
commercial carrier that would allow members to benefit from the lower rates
being offered by the commercial carriers. Accordingly, effective July 1, 1996,
the Trust entered into arrangement with TIG Insurance Company, ("TIG"), whereby
TIG would begin writing coverage for the members of the Trust with the Trust or
its successor having the right to begin writing coverage on its members again at
anytime. Consequently, the Trust has not written any new business since June 30,
1996.
The Company plans to re-enter the market in 1998 as a reinsurer of the
business currently being written by Continental and TIG as more fully described
in Company Management's Plan of Operation.
Results of Operations
There were no net earned premiums for the year ended December 31, 1997
compared to $1,987,491 in 1996. This is a result of the fact that no business
was written after June 30, 1996 as part of the Company's arrangement with TIG.
Losses and loss adjustment expenses decreased from $916,592 in 1996 to
$707,736 in 1997. Losses and loss adjustment expenses generally increase as the
payroll and premiums paid by insureds increase. These costs also can increase or
decrease as a result of adjustments made to the reserve amounts established
<PAGE>
to pay reported and unreported claims. As part of the Assumption Reinsurance
Agreement with Continental, the Company agreed to pay Continental a premium to
assume all of the insurance liabilities (reported and unreported) of the Trust.
The premium paid was more than the existing claims reserve on the books of the
Trust. Consequently, losses and loss adjustment expenses were charged in
1997 to reflect the premium paid to Continental for the assumption of all
claims. This adjustment amounted to $707,736, the entire amount of loss and loss
adjustment expense for 1997. As a result of this transaction, the Company had no
insurance liabilities at December 31, 1997. The following schedule details the
changes in unpaid claims and claim adjustment expenses from 1995 - 1997.
<TABLE>
<CAPTION>
Reconciliation of Beginning and Ending
Loss and Loss Adjustment Expense Reserves
1997 1996 1995
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<S> <C> <C> <C>
Reserves for unpaid losses and loss adjustment
expenses - beginning of year $2,834,220 $3,713,923 $3,849,169
Incurred losses and loss adjustment expenses:
Provision for the current year 0 959,032 2,558,087
Increase (decrease) in estimates for losses
Occurring in prior years 707,736 (42,440) (109,365)
------------ -------------- -------------
Total incurred claims and claim adjustment
expenses 707,736 916,592 2,448,722
Payments for loss and loss adjustment expenses incurred in:
Current year 0 (369,070) (1,197,368)
Prior years ** (2,880,970) (1,384,325) (1,388,900)
Other:
Increase (decrease) in service company
fee reserve 0 (42,900) 2,300
Assignment of reinsurance receivable ** (660,986) 0 0
-------------- ------------- ------------
Reserve for unpaid losses and loss adjustment
expenses - end of year $ 0 $ 2,834,220 $3,713,923
============= ============= ==========
</TABLE>
** Payments for prior years paid in 1997 include $1,586,463 paid to Continental
Casualty as part of the Assumption Reinsurance Agreement. Receivables due from
reinsurance contracts on outstanding claims were also assigned to Continental
Casualty as part of this Agreement.
<PAGE>
Other Expenses
Service company fees are fees paid to an outside claims administrator
to process claims. Such fees are calculated based on a percentage of collected
premium of the Company. Since the Company had no premium income after it
discontinued writing business effective July 1, 1996, no additional service
company fees were incurred. As a part of the arrangement with TIG Insurance
Company to begin writing the insurance coverage July 1, 1996, the service
company agreed to process the claims that existed at June 30, 1996 at no
additional cost to the Company. Consequently, the Company has incurred no claims
processing fees since June 30, 1996. This results in a decrease in service
company fees of $299,322 from 1996 to 1997.
Regulatory fees are fees charged by the Mississippi Workers
Compensation Commission and are based on medical and indemnity payments made to
claimants during the previous calendar year. Such fees decreased from $28,548 in
1996 to $23,004 in 1997.
General expenses decreased slightly from $450,989 in 1996 to $430,592
in 1997. In both 1996 and 1997 these expenses consisted largely of costs
involved in the development and execution of the Plan of Reorganization and
Conversion of the Trust. In 1996 these costs also included the development of
the Commercial Program established with TIG Insurance Company. In 1997, these
costs included the development and negotiation of the Assumption
Reinsurance Agreement with Continental Casualty Company.
Total expenses decreased from $1,695,451 in 1996 to $1,161,332 in 1997.
As a result of limited income and the costs associated with the reorganization
and conversion, net income before tax provision or benefit decreased from
$128,573 in 1996 to ($759,459) in 1997.
Income taxes
A tax provision of $98,768 in 1996 was replaced by a tax benefit of
$285,020 in 1997, a decrease of $383,788. This decrease in tax provision was due
primarily to the net operating loss sustained in 1997.
In 1996 the tax provision ($98,768) represented a large percentage of
pre-tax net income ($128,573) as a result of non-deductible capital losses
sustained in 1996. It appeared, at December 31, 1996, that the likelihood of the
Company being able to utilize these capital loss carry forwards was remote.
Consequently, no deferred tax provision was included for such capital loss carry
forwards. This caused the effective tax rate of the Company in 1996 to balloon
to 76% compared to a statutory combined Federal and State rate of 39%.
In 1997, the loss sustained by the Company produced a taxable loss that
the Company opted to carry back to an earlier tax year to recoup taxes paid in
that prior year. The combined Federal and State refunds relating to such carry
backs amount to $198,143. Tax benefits that will be realized in future periods
include a charitable contribution carry forward with a tax benefit of $9,750,
unamortized reorganization costs with a tax benefit of $59,234 and capital loss
carry forwards which Management believes will be utilized in future years
providing a tax benefit of $17,893. These deferred tax benefits total $86,877.
Adding the deferred tax benefit to the current tax benefit of $198,143 results
in a total 1997 tax benefit of $285,020.
During the first quarter of 1997, the Company made a Federal estimated
tax payment of $37,418. This amount will be refunded in 1998 along with the
$198,143 in carry back refunds. These amounts are included in the deferred tax
assets category on the Company's balance sheet at December 31, 1997 along with
the $86,877 in deferred tax benefits.
Investment Income
<PAGE>
Investment income decreased from $296,669 in 1996 to $193,465 in 1997
primarily as a result of the Company having less cash available for investment.
Less cash was available for investment due to the continuing payment of claims
and operating expenses without the benefit of premium revenue. No insurance
coverage had been written since June 30, 1996 which had a significant impact on
cash being received.
In 1996 the Company sustained losses on the sale of securities
available-for-sale in the amount of $37,286. The Company sustained no such
losses in 1997.
In 1996 the Company experienced a loss on trading securities in the
amount of $422,850. In 1997, a loss of $19,057 was sustained, a decrease of
$403,793. Such losses are included in "Other Income" on the Statements of Income
for 1997 and 1996. With respect to the losses incurred in 1996, the Company is
involved in Arbitration proceedings with the brokerage firm to recover its
losses.
Beginning in April, 1997 the Company engaged Investek Capital Management, Inc.
to assist the Company in the management of its investment portfolio. Investek
has substantial experience in the management of insurance company investment
portfolios.
Liquidity and Capital Resources
General
The liquidity and capital requirements for a workers' compensation
carrier is significantly different from other property and casualty carriers.
Workers' Compensation carriers generally have use of premium dollars for
investment purposes for longer periods of time because claims may be paid over a
fifteen year or longer period. Because of this long payment period, investment
income becomes a major source of revenue for most carriers. Consequently,
discounting the liability for future claims payments for the present value of
investment income that will be earned on the funds available for future expected
payments becomes a significant factor in estimating a carrier's claims
liability.
Liquidity Requirements
Effective at the close of business on December 31, 1997, the
Company's insurance liabilities were eliminated as a result of the Assumption
Reinsurance Agreement entered into with Continental Casualty Company. Because
the Company had no insurance liabilities entering 1998, the liquidity
requirements will be minimal during the first quarter of 1998.
In accordance with the terms of the Assumption Reinsurance
Agreement, the Company timely notified Continental Casualty Company of its
intention to exercise its right under the Assumption Reinsurance Agreement to
provide reinsurance to Continental for the claims that Continental assumed
from the Company in December, 1997. Pursuant to such reinsurance
arrangement, Continental will transfer to the Company the remaining assets set
aside to pay any remaining claims along with the liability for such claims.
The Company will be required to fund a trust account with a financial
institution acceptable to Continental and the Company with the amount of funds
necessary for Continental to receive full financial statement credit for such
reinsurance and with the terms and conditions of such trust to comply with the
law of Continental's state of domicile such that Continental shall receive full
financial statement credit for such reinsurance. Continental is domiciled in the
State of Illinois. In order for Continental to receive full financial statement
credit for the reinsurance under the circumstances contemplated, Illinois law
requires in general that funds be held in trust for the exclusive benefit of
<PAGE>
Continental as security for the payment of obligations under the reinsurance
agreement. The Trust must be a qualified United States financial institution as
defined in the Illinois law and must be established in a form approved by the
Illinois Director of Insurance. The security may be in the form of cash,
securities meeting the requirement of the Illinois law, letters of credit
meeting the requirements of Illinois law, or any other form of security
acceptable to the Illinois Director of Insurance. The trust agreement
establishing the trust must provide, among other things, that Continental shall
have the right to withdraw assets from the trust account at any time, without
notice to the Company, subject only to notice from Continental to the trustee,
and that the trust agreement be established for the sole benefit of Continental.
The amount of security to be deposited in the trust would be an amount equal to
the reserve requirement under Illinois insurance laws for the policies assumed
by Continental and reinsured by the Company. It is anticipated that this amount
will be approximately equal to the unexpended reserves transferred to
Continental in December, 1997. However, this amount may change because of
changes in the ultimate expected future benefits and expenses to be paid on
these outstanding claims. The amount to be held in trust will be actuarially
determined and agreed upon by Continental and the Company.
The Company entered into an arrangement with Continental on March 30,
1997 whereby the Company will participate with Continental in a quota share
reinsurance arrangement. In accordance with the agreement, the Company will
assume a 25% share of the business written by Continental as a part of this
program. The Company will be required to collateralize the agreement with
letters of credit totaling $100,000 per $1,000,000 of gross written premium. A
quota share reinsurance arrangement provides for a division of the net income
from the business written based on the participants' share of participation.
The Company was licensed by the Mississippi Department of Insurance
effective January 1, 1998. As a licensed Mississippi Insurance Company, the
Company will be required to maintain minimum capital and surplus of $400,000 and
$600,000 respectively.
Admitted Assets
For regulatory purposes, the Company will be required to maintain
its books on the statutory basis of accounting. The Company has maintained
its books in accordance with Generally Accepted Accounting Principles (GAAP
Basis). The primary difference in statutory and GAAP accounting as far as the
Company lies in the classification of assets as either admitted or
non-admitted. On a statutory basis, only admitted assets will be permitted
to be included as assets on the Company's balance sheet. Non-admitted
assets at December 31, 1997 totaled $355,605 and included deferred tax assets,
property and equipment, prepaid expenses and other assets.
Commitments
The Company has ongoing operating commitments and anticipated expenses
which total approximately $25,000 per month. Pursuant to an agreement involving
the Commercial Insurance Program, the Company receives 3.5% of annual collected
premium from the Commercial Program.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Board of Directors
Stoneville Insurance Company
Jackson, Mississippi
I have audited the accompanying balance sheets of Stoneville Insurance Company
as of December 31, 1997 and 1996 and the related statements of income,
changes in shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements present fairly, in all material
respects, the financial position of Stoneville Insurance Company as of December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Richard L. Eaton
Jackson, Mississippi
February 12, 1998
<PAGE>
STONEVILLE INSURANCE
COMPANY
Balance Sheets
December 31, 1997 and 1996
1997 1996**
---------- ---------
Assets
Investments:
Trading securities (at fair value)
Equity securities $247 1,696,944
Securities available-for-sale (at
fair value)
Fixed maturities (amortized 1,320,855 1,141,504
cost - $1,295,572 and
$1,150,740)
Securities held-to-maturity (at
amortized cost)
Fixed maturities (fair value - 0 522,884
---------- ---------
$0 and $521,940)
Total Investments 1,321,102 3,361,332
Cash and Cash Equivalents 425,493 1,379,935
Premiums receivable net of 0 0
uncollectible amount
Notes receivable 0 0
Accrued interest receivable 29,819 52,003
Reinsurance receivables, net of 0 660,986
uncollectible amounts
Excess insurance premium 0 89,860
overpayment
Capital equipment leases at cost
less
accumulated depreciation of 7,292 13,517
$12,087 and $9,775
Prepaid expenses 25,300 21,798
Deferred tax assets 322,438 152,862
Other assets 575 575
---------- --------
Total Assets $2,132,019 $5,732,868
========== ==========
Liabilities
Reserve for losses and loss $0 $2,834,220
adjustment expenses
Reserve for premium adjustment 0 384,863
Accounts payable and accrued 117,226 56,290
liabilities
Income taxes payable 0 0
Capital lease obligations 1,256 4,038
---------- ----------
Total Liabilities 118,482 3,279,411
---------- ----------
Shareholders' Equity
Common stock ($1 par value;
650,000 shares authorized;
503,384 shares issued) 503,384 0
Retained earnings 1,484,870 2,462,693
Net unrealized loss on securities
available for sale, net of 25,283 (9,236)
--------- -----------
deferred taxes
Total Shareholders' Equity 2,013,537 2,453,457
---------- ----------
Total Liabilities and Shareholders' $2,132,019 $5,732,868
Equity ========== ==========
** 1996 represents the combined
information of two previously
separate entities.
See accompanying notes to financial statements.
<PAGE>
STONEVILLE INSURANCE COMPANY
Statements of Income
For the Years Ended December 31, 1997
and 1996
<TABLE>
1997 1996**
---------- ----------
<S> <C> <C>
Revenues
Premiums earned $0 $2,077,351
Premiums ceded 0 (89,860)
---------- -----------
Net premiums earned 0 1,987,491
Investment income 193,465 296,669
Net realized gains and losses on securities 0 (37,286)
available-for-sale
Gain (loss) on disposal of equipment (1,406) 0
Other 209,814 (422,850)
----------- -----------
Total Revenues 401,873 1,824,024
--------- ----------
Expenses
Loss and loss adjustment expenses 707,736 916,592
Service company fees 0 299,322
Regulatory fees 23,004 28,548
General expenses 430,592 450,989
---------- ----------
Total Expenses 1,161,332 1,695,451
---------- ----------
Income before Income Taxes (759,459) 128,573
Provision (benefit) for income taxes (285,020) 98,768
----------- ----------
Net Income ($474,439) $29,805
========== ==========
</TABLE>
Per Share Data
Net Income ($0.94)
** 1996 represents the combined
information of two previously separate
entities.
See accompanying notes to financial statements.
<PAGE>
STONEVILLE INSURANCE
COMPANY
Statements of Changes in
Shareholders' Equity
For the Years Ended December
31, 1997 and 1996
<TABLE>
Net
Unrealized
Appreciation
Common on Securities Total
Stock Available Retained Stockholders '
Shares Amount for Sale Earnings Equity
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 0 $ 0 ($ 67,160) $2,432,888 $2,365,728
1996**
Net income (loss) 29,805 29,805
Net increase in unrealized
appreciation of
securities available for sale 57,924 57,924
--------------------------------------------------------------
Balance at December 31, 1996 0 0 ( 9,236) 2,462,693 2,453,457
1997
Net income (loss) (474,439) (474,439)
Issuance of stock upon 503,384 503,384 (503,384) 0
conversion from a Trust
to a stock company
Net increase in unrealized
appreciation of
securities available for sale 34,519 34,519
--------------------------------------------------------------
Balance at December 31, 1997 $503,384 $ 503,384 $ 25,283 $1,484,870 $2,013,537
===============================================================
</TABLE>
** 1996 represents the
combined information of two
previously separate entities.
See accompanying notes and accountant's report.
<PAGE>
STONEVILLE INSURANCE
COMPANY
Statements of Cash Flows
For the Years Ended December
31, 1997 and 1996
<TABLE>
1997 1996**
----------- -----------
<S> <C> <C>
Cash Flows From Operating
Activities
Premiums collected $0 $2,688,450
Losses and loss adjustment (2,880,971) (1,748,772)
expenses paid
Refunds and premium adjustments (61,313) (449,415)
paid
Administrative expenses paid (396,021) (1,056,978)
Income taxes (paid) refund 115,444 (625,678)
received
Investment income received 220,610 335,402
Net (increase) decrease in trading 1,696,697 429,528
securities
Net loss on trading securities (19,057)
Interest paid (141) (855)
---------- -----------
Net Cash Provided by Operating (1,324,752) (428,318)
Activities
----------- -----------
Cash Flows From Investing
Activities
Proceeds from sales of 187,726 3,185,627
available-for-sale securities
Purchase of available-for-sale (587,775) (2,611,979)
securities
Proceeds from maturities of 522,884 0
held-to-maturity securities
Reclassification from 250,257 0
available-for-sale to cash
equivalent
Capital expenditures 0 (751)
---------- -----------
Net Cash Provided by Investing 373,092 572,897
Activities
---------- -----------
Cash Flows From Financing
Activities
Principal payments under capital (2,782) (4,942)
lease obligations ---------- -----------
Net Cash Used in Financing (2,782) (4,942)
Activities
---------- -----------
Net Increase (Decrease) in Cash
and Cash Equivalents (954,442) 139,637
Cash and Cash Equivalents at 1,379,935 1,240,298
---------- -----------
Beginning of Year
Cash and Cash Equivalents at End $425,493 $1,379,935
========== ===========
of Year
</TABLE>
** 1996 represents the combined
information of two previously
separate entities.
See accompanying notes to financial statements.
<PAGE>
STONEVILLE INSURANCE
COMPANY
Statements of Cash Flows
(Continued)
For the Years Ended December
31, 1997 and 1996
<TABLE>
Reconciliation of net income to net 1997 1996**
cash provided by Operating Activities -----------------------------------------------
<S> <C> <C>
Net Income ($474,439) $30,212
Adjustments to reconcile net
income to net cash
provided by operating activities:
Depreciation 4,818 4,818
(Gain) or loss on disposition of 1,406 460,136
equipment
Decrease in trading securities 1,696,697 429,528
Decrease in premiums 0 1,337,030
receivable
Decrease (increase) in prepaid (3,502) (19,176)
expenses
Decrease (increase) in accrued 22,184 38,326
interest receivable
(Increase) decrease in 660,986 0
reinsurance receivables
(Increase) decrease in notes and 89,860 (109,860)
other receivables
Amortization of bond premium 4,961 12,646
(discount)
Decrease in unpaid losses and (2,834,220) (832,180)
loss adjustment expenses
Increase (decrease) in unearned 0 (1,466,279)
premiums
(Decrease) increase in accounts 60,936 (151,472)
liability and accrued expenses
Increase (decrease) in premium (384,863) 384,863
adjustment reserve
(Decrease) increase in income (169,576) (546,910)
------------ ----------
tax liability
Net cash provided by operating ($1,324,752) ($428,318)
activities ============ ==========
</TABLE>
** 1996 represents the combined
information of two previously
separate entities.
See accompanying notes to financial statements.
<PAGE>
STONEVILLE INSURANCE COMPANY
Notes to Financial Statements
For the Years Ended December 31, 1997 and 1996
Note 1: Description of the Company and Plan of Reorganization and Conversion
Stoneville Insurance Company (the Company) is the successor to Delta
Agricultural and Industrial Trust, (the Trust), a self-funded workers'
compensation trust formed under a Trust Agreement, dated August 1, 1991, between
the Delta Council, a Mississippi nonprofit corporation, and the Board of
Trustees of the Trust. Under a Plan of Reorganization and Conversion dated March
20, 1997, amended September 11, 1997, and effective December 31, 1997, the Trust
transferred all of its existing assets and liabilities to the Company in
exchange for all of the stock of the Company (503,384 shares). The Trust then
distributed the stock to qualified former members of the Trust and was then
dissolved.
The Trust was formed to provide its members with a source of consistent workers'
compensation insurance coverage at reasonable rates, regardless of cyclical
swings in the commercial insurance market. Premiums were determined in a manner
similar to the methods used by commercial insurance carriers, but the risk of
loss was spread among its members who were jointly and severally liable for the
obligations of the Trust. The formation of the Company was intended to provide a
locally controlled, long term source of dependable and reasonably priced
insurance without the joint and several liability associated with self-insured
pools such as the Trust.
In anticipation of the formation of the Company and due to significant changes
in the workers' compensation premium rate structure in the State of Mississippi,
the Trust entered into an arrangement with a commercial insurance carrier and
discontinued writing coverage for its members effective July 1, 1996. Coverage
for members who agreed to the change was then written by the commercial carrier.
This change provided lower rates and other benefits for the members of the Trust
during the period in which the Plan of Reorganization and Conversion was being
developed. As a result of this agreement, neither the Trust nor the Company has
written any insurance coverage since June 30, 1996. Under the agreement with the
commercial carrier, the Company has the right to begin writing coverage for the
former members of the Trust at anytime.
Prior to and as a condition precedent to the conversion, the Trust entered into
an Assumption Reinsurance Agreement with another commercial carrier whereby the
commercial carrier assumed all of the insurance obligations of the Trust. This
arrangement removed the joint and several liability of the former Trust members
and created a situation in which there were no insurance liabilities to be
transferred to the Company as a part of the conversion and reorganization. The
Company has the right to reinsure the commercial carrier for the claims assumed
by them if notice of intent to reinsure is given by March 1, 1998.
Immediately after the effective date of the conversion and reorganization, the
Company applied for a license with the Mississippi Department of Insurance. The
license was issued shortly thereafter effective January 1, 1998. The conversion
and reorganization qualifies a tax-free reorganization under Internal Revenue
Code Section 368.
Note 2: Summary of Significant Accounting Policies
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. The conversion and reorganization
described in Note 1 has been accounted for as a business combination between
entities under common control, the accounting for which
<PAGE>
STONEVILLE INSURANCE COMPANY
Notes to Financial Statements
For the Years Ended December 31, 1997 and 1996
is similar to the pooling of interests method. The prior year restatement
represents the combined information of the two previously separate entities. The
Significant accounting policies used to prepare the financial statements are
summarized below:
Trading Securities
Bonds, notes, common stocks and mutual fund shares held principally for resale
in the near term are classified as trading account securities and recorded at
their fair values. Realized and unrealized gains and losses on trading account
securities are included in other income.
Securities Held-to-Maturity
Bonds, notes and certificates of deposit (with maturities of more than three
months) for which the Company has the intent and ability to hold to maturity are
reported at amortized cost, adjusted for amortization of premiums or discounts
and other than temporary declines in fair value.
Securities Available-for-Sale
Bonds, notes, common stock and certificates of deposit (with maturities of more
than three months) not classified as either trading or held-to-maturity are
reported at fair value, adjusted for other than temporary declines in fair
value, with unrealized gains and losses excluded from losses and reported as a
separate component of stockholders' equity. Realized gains and losses are
determined on the specific identification method.
Cash Equivalents
For the purpose of presentation in the Company's statements of cash flows, cash
equivalents are short-term, highly liquid investments that are both (a) readily
convertible to known amounts of cash and (b) so near to maturity that they
present insignificant risk of changes in value due to changing interest rates.
Premium Revenue Recognition
Insurance premiums are recognized as revenue on a pro rata basis over the policy
term. The portion of premiums that will be earned in the future are deferred and
reported as unearned premiums. In determining premium rates in 1996, the Company
began with rates established by NCCI (National Council of Commissioners of
Insurance), determined by a prescribed worker classification code. The Company
then applied certain modifiers that either increased or decreased the NCCI rate
based on an individual employer's claims history. From this modified rate
certain other discounts were applied to arrive at the individual insured's
annual premium.
Reinsurance
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Amounts
recoverable from reinsurers are estimated in a manner consistent with the
reinsured policy.
<PAGE>
STONEVILLE INSURANCE COMPANY
Notes to Financial Statements
For the Years Ended December 31, 1997 and 1996
Amounts due from reinsurers are shown as reinsurance receivables, net of
uncollectible amounts on the balance sheets. Liabilities for losses and loss
adjustment expenses are not reduced by the amounts receivable from reinsurers.
Amounts ceded to reinsurer's are shown as a reduction of earned premium on the
statements of revenue.
Capital Equipment Leases
Certain assets of the Company were acquired under capital lease arrangements.
Such assets are recorded at their original cost and depreciated under the
straight-line method over the estimated useful lives of the respective assets.
Depreciation expense is included in "General Expenses".
Policy Acquisition Costs
During the period in which the Company was actively writing insurance, member
contracts renewed annually on a calendar year basis. Consequently, there were
ordinarily no unamortized policy acquisition costs to be presented on the
balance sheet at December 31.
Insurance Liabilities
The liability for losses and loss-adjustment expenses in 1996 include an amount
determined from loss reports and individual cases and an amount, based on past
experience, for losses incurred but not reported. Such liabilities were assumed
by another company in December, 1997 as a part of the Assumption Reinsurance
Agreement described in Note 1. Consequently the Company has no such liabilities
at December 31, 1997.
Income Taxes
Income tax provisions are based on the asset and liability method. A deferred
tax asset or liability is provided for temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. Such differences are related principally to the unrealized loss in
the market value of available-for-sale securities and the costs of
reorganization and conversion.
Note 3: Investments
Major categories of net investment income are summarized as follows:
1997 1996
------------ --------
Fixed Maturities $120,549 $169,037
Equity Securities 6,620 105,291
Short-term Investments 66,296 22,341
------------ ---------
Total $193,465 $296,669
======== ========
The aggregate fair value, gross unrealized holding gains, gross unrealized
holding losses, and amortized cost for available-for-sale and held-to-maturity
securities by major security type at
December 31, 1997 and 1996 are as follows:
<PAGE>
STONEVILLE INSURANCE COMPANY
Notes to Financial Statements
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Available-for-Sale Securities as of December 31, 1997 and 1996
December 31, 1997
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Bank certificates of
deposit $ 89,672 $ 328 $ 0 $ 90,000
Obligations of U.S.
government corporations
and agencies 580,951 21,415 0 602,366
Obligations of states and
political subdivisions 624,949 7,918 4,378 628,489
------------- ------------ -------------- --------
Total $ 1,295,572 $ 29,661 $ 4,378 $ 1,320,855
=========== ========== ============= ===========
December 31, 1996
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Bank certificates of
deposit $ 524,166 $ 889 $ 2,915 $ 522,140
Obligations of states and
political subdivisions 626,574 13 7,223 619,364
------------- ------------ ------------ ------------
Total $ 1,150,740 $ 902 $ 10,138 $ 1,141,504
=========== ============ ============ ===========
</TABLE>
Held-to-Maturity Securities as of December 31, 1997 and 1996
December 31, 1997
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------------- --------------- ---------------- --------------
Total $ 0 $ 0 $ 0 $ 0
================= =============== ================ ==============
<PAGE>
STONEVILLE INSURANCE COMPANY
Notes to Financial Statements
For the Years Ended December 31, 1997 and 1996
<TABLE>
December 31, 1996
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ---------------- ------------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of the
U.S. Government $ 98,966 $ 0 $ 944 $ 98,022
Bank certificates of
deposit 423,918 0 0 423,918
------------ ---------------------------------- ------------
Total $ 522,884 $ 0 $ 944 $ 521,940
=========== ================= ============= ============
</TABLE>
Gross realized gains and losses on sales of available-for-sale securities were:
1997 1996
--------- ---------
Gross realized gains:
Fixed maturities $ 0 $ 2,407
Equity securities 0 30,502
----------- ---------
Total $ 0 $ 32,909
========== =========
Gross realized losses:
Bank certificates of deposit $ 0 $ 6,039
Equity securities 0 64,155
----------- ---------
Total $ 0 $ 70,194
========== ========
The Company also realized net losses in trading securities in the amount of
$19,057 and $415,929 in 1997 and 1996 respectively. Trading security gains and
losses are included in "Other Income". Additionally, as a result of transferring
certain securities from the available-for-sale category to the trading category
at December 31, 1996, $6,921 in realized losses were included in "Other Income".
The scheduled maturities of available-for-sale and held-to-maturity securities
at December 31, 1997 were as follows:
Held-to-Maturity Securities: Amortized
Cost Fair Value
Total $ 0 $ 0
============= ==============
Available-for-Sale Securities: Amortized
Cost Fair Value
--------- -----------
Due in one year or less $ 5,093 $ 5,110
Due after one year through five years 391,779 396,530
Due after five years through ten years 898,700 919,215
---------- -----------
Total $1,295,572 $ 1,320,855
=========== ===========
There were no securities that were non-income producing for the year ended
December 31, 1997.
Note 4: Reserve for Losses and Loss Adjustment Expenses
The Company entered into an Assumption Reinsurance Agreement in December, 1997
whereby all of the insurance liabilities of the Company were assumed by a
commercial insurance carrier. Consequently, there are no reserves established
for losses and loss adjustment expenses at December 31, 1997. The reserve for
losses and loss adjustment expenses at December 31, 1996 consisted of the
following:
<PAGE>
STONEVILLE INSURANCE COMPANY
Notes to Financial Statements
For the Years Ended December 31, 1997 and 1996
1996
----------
Case-basis reserves $2,053,357
Incurred but unreported claims 727,763
Service company fees 53,100
---------
Total Reserves $2,834,220
==========
Included in case-basis reserves are amounts that are to be paid by a reinsurer.
The amount due from the reinsurer was $660,986 at December 31,1996.
Reserves at December 31, 1996 were discounted using an average interest rate of
5.5% per annum and using the Company's historical payout pattern combined with
national payment trends.
Note 5: Reserve for Premium Adjustment
The premium amounts paid by members of the Trust in 1996 were determined based
upon member provided estimates of their annual payroll by worker classification
code. The member was then subject to an audit of their payroll data to determine
the accuracy of their estimate. For the period ended June 30, 1996, management
elected to audit less than 100% of the Trust membership. Due to the limited
number of audits performed, a reserve was established for premium adjustments
that management estimated could be due in the event members who were not audited
request such an audit. In December, 1997 this reserve was reduced by $316,948 to
reflect management's belief that the likelihood of future premium adjustments
for the period ended June 30, 1996 was unlikely. This amount is also included in
"Other Income".
Note 6: Minimum Lease Payments
The Company leases certain business equipment that are treated as capital leases
in accordance with SFAS-13. Following are the present values of the minimum
lease payments under these leases as of December 31, 1997 and 1996.
1997 1996
-------- ------
1997 0 3,172
1998 1,340 1,208
------ ------
$1,340 $4,380
====== ======
Note 7: Excess Insurance
The Company acquired excess coverage insurance for accidents occurring during
the period January 1, 1996 through June 30, 1996. The specific coverage limits
the Company's liability to $350,000 per claim incurred during this period. For
claims incurred prior to January 31, 1992, the claim retention level was
$200,000 with a maximum benefit of $10,000,000. Claims incurred from February 1,
1992 through July 31, 1992 have a retention level of $250,000 and a maximum
benefit of $10,000,000. No claims are expected to exceed the maximum benefit.
<PAGE>
STONEVILLE INSURANCE COMPANY
Notes to Financial Statements
For the Years Ended December 31, 1997 and 1996
The premium paid by the Company for excess insurance was based on the annual
manual premium written by the Company. Such manual premium was estimated at the
beginning of 1996 and a premium payment made based on a full year's estimated
manual premium. However, since the Company discontinued writing coverage
effective July 1, 1996 the manual premium was less than estimated at January 1,
1996. Management estimated at December 31, 1996 that it was due a refund of
$89,860 for the excess premium paid. However, it was discovered in 1997 that the
excess premium paid could not be recovered without the completion of 100% of the
payroll audits. Consequently, the excess insurance receivable was written off
and charged against "Other Income" in 1997.
Note 8: Income Taxes
The Company is subject to Internal Revenue Code Section 831 and related
provisions. The provision (benefit) for income tax for 1997 and 1996 from
continuing operations consists of the following:
1997 1996
------------- -------
Current Income Tax Provision (Benefit)
Federal $(166,943) $ 81,142
State ( 31,200) 17,626
Deferred Income Tax Provision (Benefit) ( 86,877) 0
------------ ---------
Total $(285,020) $ 98,768
========== =========
The effective income tax rates varied from the U.S. Federal statutory income tax
rate for the years ended December 31 as follows:
1997 1996
----------- -------
Federal statutory income tax rate 34.0% 34.0%
Unused net capital loss 0.0 60.0
Dividends received deduction 0.0 (12.1)
Tax exempt interest 2.0 ( 6.1)
Special claims deduction adjustment ( 5.2) 0
State income taxes 4.1 1.0
Other 2.6 0.0
----------- --------
Effective income tax rate 37.5% 76.8%
========= ========
The Company had capital loss carryforwards at December 31, 1997 and 1996 of
$1,064,055 and $1,037,257 respectively. These capital loss carryforwards will
expire as follows:
1999 $ 406,991
2000 170,130
2001 460,136
2002 26,798
----------
$1,064,055
==========
<PAGE>
STONEVILLE INSURANCE COMPANY
Notes to Financial Statements
For the Years Ended December 31, 1997 and 1996
These loss carryforwards can only be utilized if the Company experiences future
capital gains from the sale of investments. Because the Company had changed its
investment strategy in 1996 to emphasize ordinary income rather than capital
gains, it appeared unlikely at December 31, 1996 that the Company would realize
future capital gains which would allow a utilization of the capital loss carry
forwards. Consequently, no deferred tax benefit or related deferred tax asset
was recognized in the financial statements at December 31, 1996 for the
utilization of such carryforwards. However, in early 1998, It became apparent
that a portion of the capital loss carryforwards would be utilized in future
years. Consequently an adjustment to beginning deferred taxes has been made in
the amount of $10,188 for prior years and $7,705 for the current year as a
result of the expected utilization of these carryforwards.
As a result of the net operating tax loss incurred in 1997, the Company is able
to file refund applications with both the Internal Revenue Service and the
Mississippi State Tax Commission in which the losses will be carried back in
their entirety to earlier tax years. Additionally, the Company made estimated
tax payments during 1997 totaling $37,418 which will be refunded. As a result of
this and the loss carry back, federal and state refunds due of $235,561 are
included as a component of deferred tax assets.
The components of the net deferred tax asset (liability) at December 31 were as
follows:
1997 1996
------------ -------
Deferred tax assets:
Charitable contributions $ 9,750 $ 0
Unamortized reorganization costs 59,234 0
Capital loss carryforward 414,981
Valuation allowance (397,088) 0
---------- -------
86,877 0
Deferred tax liabilities 0 0
---------- -------
Net deferred tax assets (liabilities) 86,877 0
Income tax refund due 235,561 152,862
--------- --------
Total deferred tax assets (liabilities) $322,438 $152,862
======== ========
Note 9: Operations of Previously Separate Companies
As described in Note 2, the prior year restatement represents the combined
information of two previously separate entities. The combination was effective
as of the close of business on December 31, 1997. Presented below are the
operating results of the separate entities and the intercompany adjustments made
as a result of the combination for the years ended December 31, 1997 and 1996.
<PAGE>
STONEVILLE INSURANCE COMPANY
Notes to Financial Statements
For the Years Ended December 31, 1997 and 1996
Delta
Stoneville Agricultural
Insurance & Industrial
Company Trust Combined
------------ ------------ ------------
1997
Total Revenues $ 0 $ 401,873 $ 401,873
Net Income (5,179) (469,260) (474,439)
Intercompany Interest Expense
Eliminated 1,091
Intercompany Interest Income
Eliminated 1,091
1996
Total Revenues 0 1,824,024 1,824,024
Net Income (30) 29,835 29,805
Intercompany Interest Expense
Eliminated 407
Intercompany Interest Income
Eliminated 407
Note 10: Related Party Transactions
During 1996 and 1997, the Company's day to day operations were managed by Delta
Administration, Inc. ("DAI"), a Mississippi corporation. The stock of DAI was
owned 100% by Harry E. Vickery, an officer and director of Stoneville Insurance
Company. During 1996 and 1997 Mr. Vickery received no direct compensation from
the Company. For the years ended December 31, 1997 and 1996, DAI was paid
$45,600 and $74,207 respectively for services rendered to the Company.
From July 1, 1996 through December 31, 1997, DAI received compensation from a
commercial insurance carrier for services provided to the commercial program in
Note 1. This compensation amounted to 3.5% of collected premium from the
commercial program.
Effective January 1, 1998, the relationship between the Company and DAI was
discontined and Mr. Vickery became an employee of the Company.
Mr. David R. White, an officer and director of the Company, is also an officer
and director of MRM Underwriters, Inc. ("MRM"). As the marketing director of
the commercial program described in Note 1, MRM received compensation based on a
percentage of collected premium from the commercial program from July 1, 1996
through December 31, 1997. Prior to June 30, 1996, MRM also received a fee
from a third party claims administrator, Sedgwick of Mississippi, for marketing
services provided to the Company.
MRM is also to receive a commission from Continental Casualty Company for the
placement of the Assumption Reinsurance Agreement between the Company and
Continental.
Note 11: Concentration of Credit Risk
At December 31, 1996 the Company had cash account balances in excess of the
federally insured limit at its primary depository institution.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change in accountants within the two year period
ended December 31,1997. The Company's outside auditor for 1997, Richard L.
Eaton, intends to accept a position with the Company in the second quarter of
1998 and thus, will be ineligible to serve as the Company's outside auditor for
1998. The Company has not yet selected an accounting firm to audit its 1998
financial statements.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names of the executive officers and directors of the Company and
their respective ages and positions with the Company are set forth as follows:
Name Age Position
William L. Kennedy 46 Chairman of the Board
of Directors, Chief
Executive Officer
Harry E. Vickery 62 President, Director
David R. White 47 Secretary, Treasurer,
Vice President, Director
William L. Kennedy resides in Inverness, Mississippi. He holds a BS
degree in Plant Pathology and Weed Science from Mississippi State University.
He has worked with Duncan Gin, Inc. since 1972 and currently serves as President
and Chief Operating Officer of Duncan Gin, Inc. Duncan Gin, Inc. is a multiline
agricultural entity and is one of the largest cotton ginning operations in
Mississippi. He served from inception on the Board of Trustees of the Delta
Agricultural & Industrial Trust until the conversion became effective.
Harry Vickery resides in Jackson, Mississippi. From 1962-1993, Mr.
Vickery was involved in the automobile business in Greenville, Mississippi.
Mr. Vickery was one of the original members of the Board of Trustees of the
Trust from inception until 1993 when he became Administrator. Mr. Vickery was
President and a director of Vickery Chevrolet Oldsmobile Co., Inc. which filed a
Chapter 11 bankruptcy petition in 1993. All assets of Vickery Chevrolet
Oldsmobile Co., Inc. were sold and the bankruptcy case was subsequently
dismissed.
David R. White resides in Jackson, Mississippi. He holds a BS degree
from the
<PAGE>
University of Mississippi in Accounting and Business Administration. He has been
involved in the insurance business since 1987 and has served as President and
Chief Operating Officer of MRM Underwriters, Inc. since that date. He holds a
number of awards in the insurance field and has served as president of insurance
associations both on the local and state level.
All directors hold office until the next annual meeting of shareholders
of the Company or until their successors have been elected and qualified. Unless
changed by the action of the Board of Directors, the number of directors shall
be no fewer than three (3) nor more than seven (7). Officers serve at the
discretion of the Board of Directors. There are no family relationships between
the directors and officers.
Because its stock is not registered under Section 12 of the Securities
Exchange Act of 1934, the Company is not subject to Section 16 of the Securities
Exchange Act of 1934.
ITEM 10. EXECUTIVE COMPENSATION
No compensation was paid by the Company to executive officers or
directors, except as set forth under Item 13 below. Commencing in 1998, Harry
Vickery in his capacity as President of the Company will be paid an annual
salary of $96,000. It is also anticipated that directors' fees will be paid in
1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information as of March 27, 1998 as to
persons beneficially owning more than five percent (5%) of the Company's Common
Stock.
Amount and Percentage of
Nature Outstanding
of Beneficial Common
Name Ownership Stock
Danskin, Inc. 39,567 7.86%
305 State Street
York, PA 17403
The following table sets forth information as of March 27, 1998, as to
the number of shares of Company Common Stock by the Company's directors and
executive officers.
Amount and Percentage of
Nature Outstanding
of Beneficial Common
Name Ownership Stock
William L. Kennedy 7,123 (1) 0.65%
Harry E. Vickery 0 0.00%
<PAGE>
David R. White 0 0.00%
3 Executive Officers 7,123 0.65%
and Directors as a
group
(1) Mr. Kennedy shares voting and investment power with respect to shares held
by Duncan Gin, Inc.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Harry E. Vickery is an officer and director of the Company and owns all
the issued and outstanding stock of Delta Administration. Under the Commercial
Program, pursuant to the Representative Agreement, Delta Administration, which
is a licensed insurance agency, was paid 3.5% of the collected premiums
generated by the Commercial Program in 1997 to manage the activities of the
Trust. Delta Administration also received in 1997 $3,800 a month from the Trust
in exchange for administrative services. From these funds, Delta Administration
paid the office expenses of the Trust including rent, salaries of its employees
who administer the Trust, and sponsor fees. Beginning in 1998 these arrangements
terminated and the 3.5% of the collected premiums generated by the Commercial
Program will be paid to the Company, and the Company will be responsible
for office expenses, including rent and salaries of its employees.
In 1997, Delta Administration received direct and indirect compensation
from the Trust in the aggregate amounts of $167,707.
<PAGE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are furnished or incorporated by reference as a
part of this Form 10-KSB:
Exhibit Number Description
2.1* Plan and Agreement of Reorganization and Conversion of the Trust, as
amended September 11, 1997.
3.1* Articles of Incorporation of the Company
3.2* Bylaws of the Company
10.1* Assumption Reinsurance Agreement dated as of March 20, 1997
between the Trust, Continental, and the Company
10.2* Insurance Placement Agreement dated as of June 10, 1996 between the
Trust, TIG and TIG Reinsurance Company
10.3* Representative Agreement dated as of July 1, 1996 between Mississippi
Risk Management, Inc. and the Trust
10.4* Assignment and Assumption Agreement dated as of March 20, 1997
between the Trust and the Company
10.5* Amendment Number One dated September 5, 1997 to
Assumption Reinsurance Agreement between the Trust,
Continental, and the Company included as Exhibit 10.5
to the Registration Statement on Form S-4, as amended
(File No. 333-24739), filed September 16, 1997.
27 Financial Data Schedule.
* Previously filed as Exhibits to to the Company's Registration Statement on
Form S-4 (File No. 333-24739) and incorporated by reference herein.
(b) Reports on Form 8-K: None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STONEVILLE INSURANCE COMPANY
BY::/s/ Harry E. Vickery
-------------------------------------
HARRY E. VICKERY,
PRESIDENT
DATE: MARCH 31, 1998
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
DATE: March 31, 1998 BY:/s/ William L. Kennedy
-----------------------------------------
William L. Kennedy, Director
(Chief Executive Officer)
DATE: March 31, 1998 BY:/s/ Harry E. Vickery
-----------------------------------------
Harry E. Vickery, Director
(Principal Accounting Officer and
Principal Financial Officer)
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